Standard Costing, Operational Performance Measures

1. Standard-cost systems are used to help managers control the cost of operations. The system has three components: standard costs (i.e., predetermined costs), actual costs, and the difference between the two figures (termed a variance).

2. A standard cost for each product cost category (materials, labor, and overhead) is calculated on a per-unit basis.

➢ This calculation considers the planned quantity of each input factor allowed (pounds, hours, etc.) and the planned price for each input factor (price per pound, rate per hour, etc.). The total planned cost is a mini, per-unit budgeted amount.

• After the actual costs are known, a report is generated that shows actual costs, planned costs, and related variances. A manager can examine the variance column quickly to ascertain which exceptions require attention.

➢ Following up on significant variances is called management by exception. Managers focus their efforts where they are most needed in the limited time available.

2.SETTING STANDARDS

3. Managers set standards by analyzing historical data. However, past data must be adjusted for expected changes in technology, the production process, inflation, and other similar factors.

➢ Managers also use task analysis to focus on how much a product should cost.

• Knowledgeable people such as engineers, purchasing agents, production supervisors, and accountants should be brought into the standard-setting process. Cross-functional teams are very useful here.

4. Two types of standards may be used: perfection standards and practical standards.

➢ Perfection (ideal) standards assume that production takes place in the ideal world: employees always work at peak performance, materials are never defective, and machines never...